US inflation slows to 14-month low

US CPI inflation was in line with expectations in December, slowing to a 14-month low of 6.5% y/y, down from 7.1% in November and from a peak of 9.1% in June. Core inflation was also in line with consensus predictions as it slowed to 5.7% y/y, from 6.0% previously. Prices were 0.1% lower m/m on the headline (falling for the first time in two and a half years), while monthly core inflation was 0.3%. While shelter costs ticked up, lower prices at the pump more than offset this, driving the slowdown. Services accounted for the bulk of the annual price growth at 4.1pp while energy fell to just 0.5pp.

While markets had seemingly been hoping for another downside surprise on the inflation print following several recent below-expectations results, the slowdown will all the same likely enable the Fed to further slow the pace of its rate hiking at its upcoming meeting, with a 25bps move higher the most likely outcome. Philadelphia Fed President Patrick Harker said yesterday that he viewed 25bps increments as now being appropriate, but that he does still expect several of these to come.

CPI inflation in India also slowed as it fell to 5.7% y/y, from 5.9% in November, bringing price growth back within the RBI’s target range of 2%-6% for the first time since December 2021. A normalisation in global commodity prices have helped slow price growth, with pressures from food prices in particular easing off, while recent rate hikes from the RBI will also have softened demand. Meanwhile, industrial production in India expanded 7.1% y/y in November, compared to a 4.2% contraction in October and beating predictions of 2.8% growth. Manufacturing expanded 6.1% y/y and mining production 9.7%.

Following on from pledges of further financial support from Saudi Arabia announced earlier in the week, the UAE has also announced that it will step up its aid to Pakistan. An existing USD 2bn load deposited at Pakistan’s central bank is set to be rolled over, with a further 1 bn dollars set to be added to that. Pakistan’s finances have come under pressure, with reserves dwindling to three weeks’ of imports. Pakistani Prime Minister, Shebhaz Sharif, said that ‘this support will help us tide over economic difficulties.’

Today’s Economic Data and Events

• 19:00 US University of Michigan consumer sentiment index, January. Forecast: 60.5

Fixed Income

• US Treasuries rallied on the release of the December CPI print for the US, which came in as expected at 6.5%, its slowest pace since October 2021. Price action on release of the inflation data was choppy but ultimately yields settled lower with the 2yr UST yield down 7bps at 4.1447% and the 10yr yield falling 10bps to 3.44%. attention will now turn to the FOMC decision at the start of February where a 25bps hike seems the most likely outcome. Patrick Harker, president of the Philadelphia Fed, said a 25bps would be “appropriate going forward” along with more moderate voices from Susan Collins and Thomas Barking (Richmond).
• European bond markets also gained with yields on the 10yr bund down about 5bps to 2.148% and French bond yields off by 4% to 2.61%. The gains in Europe are likely being helped by a more positive outlook for Treasuries even as ECB officials have maintained a hawkish tone in public commentary.
• Bond markets in general were lifted overnight with high-yield bonds up about 0.6% and emerging-market USD bonds added 0.6%. The softening in UST yields will open the window for more issuance.
• Turkey priced a 10yr USD Eurobond at 9.75%, tighter than initial guidance, and raised USD 2.75bn in an oversubscribed deal. Turkey last went to market in November 2023 for a 5yr issue that priced at 9.875%.

FX

• Immediate FX market response to the CPI print was highly choppy but ultimately the drop in yields, and expectations that the Fed won’t have to tighten as much or for as long, helped to sink the dollar against peers. EURUSD rallied 0.9% to close at 1.0853, its fifth day in a row of gains. GBPUSD added 0.5% to close at 1.221 while USDJPY plummeted 2.4% to 129.25, its first close below 130 since Q2 2022.
• Commodity currencies also closed stronger with USDCAD down 0.4% at 1.3367 and AUDUSD adding 0.9% to 0.6969.

Equities

• Equity markets were broadly positive yesterday, as expectations for a slowdown in US CPI inflation were met. In the US, the S&P 500 gained 0.3% while the Dow Jones and the NASDAQ both added 0.6%.
• In Europe, the composite STOXX 600 closed up 0.6%. The DAX and the CAC both added 0.7% and the FTSE 100 0.8%.
• Locally, the DFM added 0.5% and the ADX 0.1%. Saudi Arabia’s Tadawul gained 1.2%.

Commodities

• Oil prices kept their rally intact overnight with Brent futures up 1.7% to USD 84.03/b, rising four days in a row, while WTI futures added 1.3% to USD 78.39/b, gaining for six consecutive days. The broad risk-on moves overnight in response to the US CPI print will help commodities generally with oil market getting an extra support from an anticipate increase in China’s demand this year.
• The UAE has named Sultan al Jaber, head of ADNOC, as the president of the upcoming COP 28 summit to be held in the country at the end of the year. The president of the conference is instrumental in setting the agenda for negotiations which this year may focus on operationalizing many of the agreements reached at COP 27 in Egypt last year.
• The optimism from the CPI print stretched into metals markets as well with copper forwards consolidating above USD 9,000/tonne on the LME. Gold prices also moved higher, up 1.1% at USD 1,897/troy oz.

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